Market Movers & Shakers

A note of caution has crept into markets this week, even as major U.S. indices hover just below record highs. Stocks have retreated from recent highs amid growing concerns over lofty valuations and increasing scrutiny of the sustainability of the AI trade. Markets have also grown uneasy amid signs the Federal Reserve may not move to cut interest rates again next month. The government shutdown, now the longest on record, has shut off the flow of key economic data on the state of the U.S. labor market, trajectory of inflation, and strength of the consumer, resulting in further uncertainty among investors and policymakers. Taken together, these factors have contributed to an increase in volatility, weak and narrow market breadth, and a selloff in certain “riskier” pockets of the market, with the crypto complex getting hit particularly hard. CNN’s Fear & Greed Index, used to gauge the “mood” of the market, recently fell to “extreme fear” levels despite the S&P 500 being within a few percent of all-time highs.



Source: Fear & Greed Index, CNN Business

Despite some choppiness in the market this week, the major U.S. indices closed last week higher, rounding out the month of October on a high note. The S&P 500 logged its sixth straight monthly gain, up 2.27%, while the Nasdaq posted its seventh consecutive monthly gain, closing higher by 4.70%. Market leadership in October was very narrow, with gains concentrated primarily in large cap stocks and in the Technology and Consumer Discretionary sectors. Five of the Magnificent Seven stocks reported earnings last week (Apple, Amazon, Google, Meta, and Microsoft), with Google and Amazon outperforming the pack, while Meta lagged. Nvidia became the first company to surpass $5 trillion in market capitalization, taking just three months to add $1 trillion in market cap after breaking through the $4 trillion level in July. To put just how large this number is into perspective, according to IMF estimates, there are only two countries in the world that will have a higher GDP this year than $5 trillion: China and the United States.



Source: FactSet

Looking at the broader market, the average stock faired much worse than their larger counterparts in October. The equal-weight S&P 500 trailed the market-cap weighted index by 320 basis points, ending the month lower by 0.93%. In the small-cap space, the Russell 2000 rose 1.76% while the S&P 600 fell 0.87%. The divergence stems from a fundamental difference in index construction: the Russell 2000 includes companies regardless of profitability, whereas the S&P 600 only admits firms with several consecutive quarters of positive earnings. This makes the S&P 600 a higher-quality benchmark by factor standards, while the Russell 2000 is generally considered lower quality. In recent weeks, lower-quality stocks have led the small-cap rally. A handful of speculative plays, including quantum computing stocks and nuclear energy startups aiming to power future AI datacenters, have climbed the ranks—earning spots among the Russell 2000’s top 20 holdings even though they generate little to no revenue or earnings.



Source: FactSet

The Federal Reserve lowered interest rates last week by 25 basis points as widely anticipated by markets. The Federal Open Market Committee (FOMC) voted 10-2 to lower its benchmark overnight borrowing rate to a range of 3.75-4.00%. Fed Governor Stephen Miran dissented, advocating for a larger half-point cut, while Kansas City Fed President Jeffrey Schmid also dissented, but for the opposite reason, arguing that the Fed should refrain from any further cuts at this time—marking the first time since 2019 that there were dueling dissents. Alongside the interest rate decision, the Federal Reserve also announced that it will stop shrinking its balance sheet, effective December 1st, amid evidence money market liquidity conditions have begun tightening and bank reserve levels are dropping. The Fed’s balance sheet, which stood at roughly $4 trillion before the pandemic, topped out at nearly $9 trillion in early 2022. In mid-2022, the Fed began allowing securities to mature and roll off the balance sheet, shrinking to $6.58 trillion where it stands today.



Source: FactSet

During Fed Chair Powell’s post-meeting news conference, he noted “there were strongly differing views about how to proceed in December” and that “a further reduction in the policy rate at the December meeting is not a forgone conclusion – far from it.” Powell went on to mention that there is a “growing chorus” among Fed officials to “at least wait a cycle” before cutting interest rates again. Following his remarks, the probability of a December rate cut fell to 67% from 90%, according to the CME Group’s FedWatch tool.

Updates & News*

Earnings season coupled with increased volatility in individual stocks has sustained Tandem’s transition speeds in manager-traded accounts at an accelerated pace relative to historical norms. New accounts and accounts with recent deposits that have been under Tandem’s management for two weeks are over half of the way invested in our strategies. By the one-month mark, new money is nearly three-quarters of the way in line with our strategies.

In portfolio news, Amphenol, a maker of electronic components that has been enjoying higher demand from the massive buildout of AI data centers, reported results that far exceeded the company’s guidance and Wall Street expectations. Amphenol reported quarterly earnings of $0.93 per share on revenue of $6.2 billion, surpassing analyst expectations of $0.79 per share and $5.5 billion in revenue. Amphenol’s board of directors also announced a 52% increase in the company’s quarterly dividend, to 25 cents a share from 16.5 cents. Microsoft reported stronger-than-expected results for the September quarter, posting earnings of $4.13 per share on revenue of $77.7 billion, exceeding analyst estimates of $3.67 per share and $75.4 billion in revenue. Microsoft’s Azure Cloud revenue grew 40%, surpassing estimates of 38% growth, driven by sustained customer demand amid the ongoing AI expansion. Speaking of AI, Microsoft and OpenAI announced last week that OpenAI will convert its for-profit subsidiary into a public-benefit corporation, of which Microsoft will have a 27% ownership stake. OpenAI also agreed to purchase an additional $250 billion in Azure services from Microsoft over time. In the healthcare space, Stryker reported a strong quarter with broad-based acceleration across its diversified portfolio, while ResMed saw robust demand across both its sleep devices portfolio and its masks/accessories business. Both companies beat sales and earnings estimates and saw margins expand during the quarter. Last but not least, Church & Dwight delivered strong third-quarter results, with organic sales growth more than doubling guidance driven by strong volume growth. The company reported market share gains across its portfolio of brands, specifically in categories like cat litter and laundry detergent.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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